Tuesday saw Armadale Capital (LSE:ACP) confirm its 100%-owned Mahenge Liandu project as a “large, long-life, low-cost graphite deposit” in its long-awaited definitive feasibility study (“DFS”). The work gave the Tanzania-based project a substantial estimated net present value of $358 million (£289 million) and an attractive internal rate of return of 91%.

However, with these figures being underpinned by a highly conservative graphite price, the reality is that Mahenge Liandu could, in fact, be worth much more to Armadale. With this in mind, the company begins to look all the more undervalued with a current market cap of just £10 million.

Just the beginning

To recap, Mahenge Liandu is one of the most significant graphite resources in Tanzania, with an estimated indicated and inferred mineral resource of 59. million tonnes at 9.8% total graphitic carbon (TGC).

Critically, the asset can consistently produce high quality, high purity graphite suitable for application in the lithium batteries used to power electric vehicles. This is a market that Deloitte expects to more than double in size over the next five years alone. Even more rapid expansion is predicted in the years beyond this as the world moves entirely away from traditional vehicles.

Armadale plans to develop Mahenge Liandu using a staged ramp-up approach. Specifically, it will produce 60,000 tonnes of graphite a year for the first four years of operation, before increasing this to 90,000 tonnes for the remainder of the asset’s initial 17-year mine life.

In Tuesday’s DFS, Armadale found that this approach would provide total pre-tax cashflow of $882 million over life of mine, with payback expected over just 1.6 years against a capital cost estimate of $38.6 million. These figures are already attractive. Indeed, as Armadale’s chairman Nick Johansen put it on Tuesday:

This study represents one of the most significant de-risking milestones in the company’s history to date, and we are delighted with the outcome. Across all commodities globally, there are few mining projects that can demonstrate economics such as a 91% IRR and a 1.6-year payback upon capital.”

However, it is critical to note that the organisation that average sales price underpinning these economics is just $1,179 per tonne (“/t”). Not only is this considerably lower than the $1,271/t basket price used by the firm in its scoping study back in March 2018, but it is far below the rate that battery-grade graphite typically commands.

In May last year, Armadale’s neighbour Black Rock Mining was able to secure binding sales agreements for its “premium” (97.5-98.5% TGC) grade and “ultra” (>99% TGC) grade graphite of between $1,490/t and $2,161/t.

Armadale has proven that Mahenge Liandu can easily mirror these sorts of grades, with work last month confirming that the project is capable of grinding a consistent purity of above 97%. If, like Black Rock, the firm can sell its graphite for up to $2,161/t, then the impact on Mahenge Liandu’s fundamentals would be monumental.

Alongside this, the project itself offers an enormous amount of upside – current calculations utilise just 25% of its total resource, which remains open in multiple directions. As Armadale itself put it in Tuesday’s release, Mahenge Liandu offers scope for improved economics through the “delivery of further detailed modelling of higher-grade zones”. Work here is already underway.

Moving forward, Armadale plans to begin its application for a mining licence in the second quarter and has put forward a projected timeline to first production of around 10-12 months from the start of construction.

Now that it has established strong economics on conservative grounds for Mahenge Liandu and shown the asset’s upside, the road to securing the necessary funding for these stages is much clearer for Armadale. Indeed, as Johansen highlighted on Tuesday, potential offtake agreements have been secured and are now much more likely to move forward. Likewise, he said the company was now in a strong position to advance workstreams on potential debt finance packages and project level development funding for construction.

Updates on these developments seem likely over the coming weeks and months. Once the current, Covid-19-driven market turmoil passes, perhaps we will finally see the catalyst that triggers a re-rate for Armadale that will allow its market cap to more accurately reflect Mahenge Liandu’s value.

Author: Daniel Flynn

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